Published in The Business Reporter – Read the full issue here
It’s a market with annual transaction values of more than $1trillion, high anticipated rates of growth over the next five years, where customers are often plagued by cumbersome processes and aging technology. Against this backdrop, it is perhaps not surprising that new technologies and regulatory change are reinvigorating B2B payments, sparking a wave of collaboration between fintechs and traditional financial institutions. Despite the opportunities however significant challenges remain in a diverse and complex sector.
Compared with widespread innovation in consumer payments largely stimulated by the digital economy, commercial banking solutions – previously a one-size-fits-all landmass that splintered into separate islands of innovation to address specific needs – have left finance and treasury teams with a cumbersome patchwork of payment services and isolated pools of transaction data.
This has been compounded by concerns among businesses of the risks in automating treasury payment processes, including loss of control of the authorisation process and a perceived risk of working with unproven fintech innovators, so that solutions to reconnect these isolated pools into one have been unsuccessful.
With annual, recurring transaction spend between businesses of more than $100trillion and high rates of growth anticipated as the digital ripple reaches business shores, the pools are sufficiently deep to need fintech innovation.
In some regions, a sea change could be on the way. In Europe new regulations, such as the EU’s PSD2 will open the payments marketplace to non-bank competitors, forcing banks to reduce charges and innovate. Although they are doing it at a slower pace, some US banks are also taking tentative steps towards open APIs for third-party providers of payment services.
For many innovators in the commercial payments sector, this is long overdue. Alex Mifsud, CEO of Ixaris, an online commercial payments solutions provider, refers to what he calls the three Cs – “Cost, Control, Convenience” – as “significant structural inefficiencies in current payment technologies which are being addressed by retailers, that are given much less attention in the commercial sector.
Despite the gradual move towards open banking frameworks however, it’s not quite Land’s End for the banking industry yet. Revenues from, and the relationships with, business customers are highly coveted within banks, meaning incentives for innovation and initiatives to retain customers are high. For incumbent banks with the foresight and the courage to adapt to the new conditions, there are significant opportunities, as well as the advantage of a conservative corporate treasury industry that would often prefer to stay with their existing bank.
An example of this is the growth rates of existing commercial payment products such as commercial cards, including virtual cards. Alan Hawkins, Head of Commercial Cards at ING, points out that the sector is booming. “Our traditional business is still growing,” he says. “[But] our virtual cards for corporates – the capacity to pay safely online without using a physical card – is growing at more than 50 per cent a year.”
Another approach that traditional banks can take is to collaborate with the burgeoning fintech community, many of which are taking slices of the corporate payments marketplace such as foreign exchange and international money transfers.
According to Stephen Lemon, co-founder of the foreign exchange and international payments platform Currencycloud, which recently closed an investment round with Google Ventures, the current environment has “never been so easy for collaboration” – especially for a company with technology created using open APIs such as Currencycloud.
Lemon’s firm has already struck deals with Travelex and Standard Bank to outsource its foreign exchange transactions businesses – deals that reduce costs for the two established high-street names while at the same time enabling Currencycloud to grow its business internationally. As Lemon puts it, “Lots of big corporates are now on a mission to find out more about what’s going on in fintech – and this is born from necessity, as they face both regulatory and capital management challenges.”
It’s a market that is on the verge of disruption and fragmentation as the digital economy drives cross-border commerce and electronic payment integration. The opportunity for commercial payments providers is to help companies large and small to navigate toward this new world of treasury innovation, and make sure they pick the right partners that can help them reduce the risk, and some of the pain, of the digital transition.